Fourth Circuit Vacates Judgment in Favor of Defendants in PSLRA Case
In the early part of this decade, BearingPoint underwent a rapid expansion across the globe. It had substantial difficulty integrating the companies it acquired into its existing operations. In the words of the Fourth Circuit, "[i]n short, BearingPoint lacked internal controls that were adequate to maintain reliable financial reporting and ensure compliance with applicable laws and regulations."
As a result of these difficulties, BearingPoint was required to revise a number of financial statements filed with the SEC between 2003 and 2005. The Plaintiffs alleged that the "financial statements were materially false and misleading because, among other things, they misstated BearingPoint's revenue, net income, earnings per share, and goodwill."
The question before the Fourth Circuit was whether the allegations in the First Amended Complaint gave rise to a "strong inference" of scienter. In order to withstand a motion to dismiss, the inference of scienter must be at least as likely as any plausible opposing inference.
After reviewing the allegations contained in the First Amended Complaint, the Court of Appeals found that it was as likely as not that the misstatements were the result of either insufficient information or "BearingPoint officials struggling to integrate recent worldwide acquisitions, manage thousands of employees, and account for billions in revenue." Therefore, the Court held that "[f]or each of the financial statements, plausible non-culpable inferences are at least as likely as an inference that any defendant acted knowingly or recklessly with respect to the misstatements."
However, the Court of Appeals vacated the judgment because it disagreed with the District Court's decision to deny the Plaintiffs' post-judgment motion seeking to file a second amended complaint. The Plaintiffs should have been allowed to file a second amended complaint because they did not act in bad faith, Defendants would not be prejudiced by the filing of a second amended complaint, and the allegations contained in the second amended complaint would have changed the analysis that ought to have been conducted by the District Court with respect to scienter.
Judge King concurred in judgment only. In Judge King's opinion, the First Amended Complaint contained sufficient allegations to establish a strong inference of scienter and should not have been dismissed.